DXC Technology Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2024

There are 11 speakers on the call.

Operator

Hello, and welcome to the DXC Technology Q4 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to John Sweeney, Vice President, Investor Relations. You may begin.

Speaker 1

Thank you, and good afternoon, everybody. I'm pleased that you're joining us for the DXC Technologies 4th quarter fiscal year 2024 earnings call. Our speakers on the call today will be Raul Fernandez, President and CEO and Rob Del Bene, our EVP and CFO. The call is being webcast at DXC Investor Relations website and the webcast includes slides that will accompany this discussion today. Today's presentation includes certain non GAAP financial measures, which we believe provide useful information to our investors.

Speaker 1

In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures. These reconciliations can be found in the tables included in today's earnings release and in the webcast slides. Certain comments we make on the call will be forward looking. These statements are subject to known risks and uncertainties, which could cause actual results to differ materially from those expressed on the call. A discussion of these risks and uncertainties is included in our annual report and Form 10 ks and other SEC filings.

Speaker 1

I'd now like to remind our listeners that DXC Technology assumes no obligation to update the information presented on the call except as required by law. And with that, I'd like to introduce DXC's President and CEO, Raul Fernandez. Raul?

Speaker 2

Thank you. I'll give a brief introduction, review our financial performance, update you on the progress we are making with our offerings, then Rob will take us through the Q4 financial results and discuss our fiscal year 'twenty five guidance. I will also make some final remarks before opening the call up for questions. In Q4 of fiscal year 2024, total revenue declined 5% on a constant currency basis, above our expectation. Adjusted EBIT margin of 8.4%, down 50 basis points year over year.

Speaker 2

Non GAAP EPS of $0.97 was also above our guidance range. Free cash flow equaled $155,000,000 for a total of $756,000,000 for the full year. This is the 3rd consecutive year that DXC has achieved free cash flow of more than $700,000,000 While we met or beat expectations in Q4, we know we can operate at a higher level and are not satisfied with the current state. In my 5 month tenure, I have met with more than 3 dozen customers globally, along with thousands of our employees in small and large settings, in person and virtual. I have engaged with dozens of investors and have successfully recruited very strong experienced executives to join our team.

Speaker 2

I believe we have a global team that is reenergized to make the company better and more effective. I've also gotten a deeper understanding of all of our business units. So let me quickly recap a few thoughts, starting with insurance. DXC is the largest provider of insurance software and insurance business process services globally, from origination to claims processing. We are the category leader providing software and services in 3 out of 4 insurance segments: life and wealth, global specialty and reinsurance.

Speaker 2

As an example, our technology and services process 1 in 5 property and casualty transactions worldwide. Our global customer base includes 21 of the top 25 global insurance carriers. In short, we are a key strategic technology partner supporting global insurance companies with their customers, their agents and their employees. The strong recurring and reoccurring revenue, coupled with 90 plus percent customer retention and an average customer tenure of 18 years makes this a very interesting business unit for me to focus on. As Rob will comment, the insurance software and services business, representing approximately 3 fourths of the total insurance revenue, grew at a very respectable 4.5% in the quarter.

Speaker 2

It's an incredibly strong foundation to build on and continue to grow and also to rotate our revenue mix more towards SaaS and reoccurring services. So we are actively working on a focused plan to further accelerate the growth of this business unit and also highlight the value of its leadership role in the industry and its mix of software and reoccurring services. Continuing with GBS, we're bringing together the best capabilities of our analytics and engineering and applications business now called consulting and engineering services with industry veteran Howard Beauville as our General Manager. Our Consulting and Engineering Services business has a rich and extensive history of driving transformative change for some of the world's biggest brands. In Financial Services, we provide core banking solutions to numerous banks globally.

Speaker 2

Within automotive and manufacturing, we are deeply involved in their digital transformation. We enable major auto brands to operate their research and development efforts for autonomous driving on our platform, enabling the ingestion and analysis of large data sets. We have built and run-in car infotainment systems across most of the luxury brands. While our technology solutions and operations are critical for our customers, our execution is below average, and we are focused on improving the profitability of our consulting and engineering services business unit. Moving on to security, a key thing to note about our security business is that it is an enabler of many of our other services.

Speaker 2

Customers in our ITO and modern workplace rely on us to provide services in a secure resilient way. Our security teams embed themselves in those offerings to do that in cooperation with our clients. We have over 3,000 secondurity professionals operating across 8 global security operation centers where we provide around the clock coverage for our customers. As cyber threats increase by the day, not a week goes by that our teams are not called in to assist companies dealing with a security incident. The pace and complexity of these attacks are growing as the regulatory requirements for companies dealing with them.

Speaker 2

Our focus in the security business is to continue to leverage our expertise to enhance our GBS and GIS offerings, while also focusing on accelerating growth of our standalone services. With the recent addition of several industry veterans, we expect to enable that growth. Moving on to cloud and ITO. For our cloud and ITO offering, we provide business and mission critical services for some of the world's most essential workloads. As I have spent time in the business, I meet more and more customers who reiterate how critical our work is.

Speaker 2

Many of the world's largest airlines, energy companies, financial institutions, along with government organizations count on DXC for the systems at the heart of their business. Our teams around the globe work 20 fourseven to keep their operations running seamlessly and securely. This is a core competency of the company. We operate across the entire technology domain from legacy core mainframes all the way through the most cutting edge serverless cloud environments on AWS, Azure and Google Cloud. As our customers modernize their estates, moving on to more cloud and modern architecture, often with the help of our GBS business unit, we are well positioned to help them securely operate across multiple environments.

Speaker 2

This is the foundation we are building on as we pivot our focus in this business to high quality, profitable, cash generating service revenue and away from the heavy hardware, software and data center outsourcing style deals of the past, which drove higher revenue at the expense of profit. Continuing with Modern Workplace, we support over 7,000,000 devices and employees all day every day. The employee experience is more mission critical than ever. Today, we operate services with a combination of human and non human workforce globally and at scale. Driven by AI, we believe we will reach a point soon where at least 75% of our workforce capacity is non human.

Speaker 2

We are building and demonstrating expertise in how to manage the non human workforce at this scale. In dialogue across our customer base, the message is clear. Embracing AI technology is a central part of their digital strategy going forward and we are well positioned to lead this. As I mentioned before, and it's even more clear to me now, there were missed opportunities in the past to rationalize systems, processes, legal entities, go to market and delivery functions. Therefore, to strengthen our market position, we are undertaking a restructuring initiative aimed at simplifying and enhancing our operational efficiency.

Speaker 2

We will simplify our processes, increase visibility to eliminate redundancies, reduce costs, improve resource management and ultimately drive a more streamlined, agile and competitive organization. One specific example of this enterprise initiative is consolidating our 5 acquired enterprise business systems and optimizing our back end office functions. We anticipate not only a material reduction in our operating costs, but also improvements in our service delivery and responsiveness to our customers. We are also aligning our organizational structure to support streamlined operations with improved and faster decision making. This realignment will make us more competitive.

Speaker 2

Now Rob will walk you through the financials.

Speaker 3

Thank you, Raul, and good afternoon, everyone, and thanks for joining our call. Today, I'll review our Q4 financial results and then provide you with our outlook for the full year and for the Q1 of fiscal 2025. Total organic revenue growth declined 4.9% year to year ahead of our 4th quarter guidance. GBS revenue was nearly flat, while GIS top line declined 9.3%. Adjusted EBIT margin was 8.4%, above the top end of our guidance, representing an 80 basis point improvement sequentially, driven by our cost reduction initiatives.

Speaker 3

Margin was down 50 basis points year to year, primarily driven by lower non cash pension income and the impact of gains from asset sales booked in the 4th quarter of fiscal 2023. Non GAAP EPS was $0.97 down $0.05 from last year's 4th quarter. The year to year change was driven by a negative $0.13 adjusted EBIT impact, higher taxes of $0.08 and a non controlling interest impact of $0.03 These reductions were partially offset by a $0.19 benefit from our share repurchase program. Free cash flow, defined as operating cash flow less CapEx, for the quarter equaled to $155,000,000 compared to our expectation of about $200,000,000 The shortfall was due to a combination of a smaller benefit from working capital and higher than anticipated cash tax levels. For the year, our free cash flow totaled $756,000,000 which was the 3rd straight year above $700,000,000 demonstrating consistency of cash generation performance.

Speaker 3

And now I'll turn to our Q4 key financial metrics. Gross margin equaled 23.6 percent, flat year to year as we continued to drive workforce optimization and reduce our real estate footprint in the face of declining revenue. SG and A was 8.7 percent of revenue, down 70 basis points year to year, largely driven by ongoing spending management and a $10,000,000 non recurring insurance reimbursement. Depreciation and amortization was flat year to year as a percent of revenue, down $17,000,000 reflecting continued capital discipline. Other income for the quarter was 39,000,000 a year to year reduction of $48,000,000 which is 120 basis point impact to EBIT margin driven by lower pension income of $26,000,000 and lower gains on asset sales of $19,000,000 Now turning to our segment results.

Speaker 3

For GBS, organic revenue performance was nearly flat year to year with the deceleration largely driven by the ongoing challenging market environment for analytics and engineering and applications. GBS profit margin equaled 13.3 percent, down 40 basis points year to year, but up 140 basis points sequentially, primarily driven by more favorable mix of higher margin services revenue. For GIS, organic revenue declined 9.3%, largely consistent with our performance throughout the year. We have taken a very disciplined financial approach with new deals and renewals and this has been reflected in our bookings and revenue performance of both cloud and ITO and modern workplace. GIS margins declined 40 basis points year to year with operational improvements more than offset by a lower level of pension income.

Speaker 3

Let me now provide some detail on our individual offerings, 1st in GBS. Both analytics and engineering and applications organic revenue declined 1% year to year as performance continues to be impacted by the current challenging market environment. While the revenue decline, the book to bill ratios for these two businesses were 1.0 or better with strong renewal activity that does not provide incremental short term revenue, but provides longer term revenue stability. Insurance organic revenue increased 1% year to year. Embedded in this performance is our insurance software and services business, which represents approximately 3 quarters of the total that continued its strong momentum, up 4.5% in the quarter.

Speaker 3

Normalizing for a significant large perpetual license sale in the Q4 of last year, the insurance software and services business grew approximately 9% year to year. The insurance book to bill was 0.8x. As a reminder, bookings in this business can vary significantly quarter to quarter based on the timing of large renewals. For example, last quarter, we had 2 significant renewals and our book to bill was 1.58. Now moving to our GIS segment.

Speaker 3

Security declined 9% year over year on an organic basis with a book to bill ratio of 0.96. Cloud Infrastructure and IT Outsourcing organic revenue declined 7%, an improvement from double digit declines we saw in the prior three quarters due to significant resale transaction delivered in the quarter. The book to bill was 0.75x, the result of the ongoing challenging ITO market and our selective approach to new deals. Modern workplace organic revenue declined year to year in the mid teens impacted by resale revenue, which was down 30%. Book to bill performance this quarter was a strong 1.29x due to several large renewals.

Speaker 3

Now turning to our financial foundation. We sequentially reduced our total debt levels by $450,000,000 and for the full year, our total debt levels have been reduced by $300,000,000 Net interest expense for the quarter was $20,000,000 up $3,000,000 year to year, reflecting the higher interest rate environment on our short term borrowings. Restructuring and TSI expense was $21,000,000 and for the full year was $118,000,000 about half of the level spent in fiscal 2023. Operating lease payments of $84,000,000 were down $9,000,000 year to year due to the management of our real estate footprint. The 4th quarter capital expenditures were $125,000,000 and lease originations were 21,000,000 dollars Our finance lease and asset financing payments continued to trend down and as a percentage of revenue, capital expenditures and lease originations declined to 4.3%, down more than a point year over year, representing a multi year low.

Speaker 3

Turning to capital deployment. As I mentioned, in the Q4, we deployed approximately $450,000,000 of cash to reduce our debt levels. We accomplished this by retiring our outstanding balance of commercial paper and continuing to decrease our lease portfolio. We returned $138,000,000 of capital to shareholders, repurchasing 6,200,000 shares at a weighted average price per share of $22.30 For the full year, we repurchased over 18% of our shares outstanding at a total cost of $883,000,000 dollars Since the beginning of the fiscal year 2022, we have reduced our share count by more than 30%. As we enter a new fiscal year, I would like to provide clarity on our updated financial priorities.

Speaker 3

Our plan is to deploy our capital to accomplish 2 things. 1st, given our recent revenue performance, we will execute a restructuring program to address excess capacity, largely concentrated in GIS and right size our infrastructure throughout the company to improve profitability. The second priority is to further reduce debt levels, including significantly minimizing finance lease originations. Now turning to our full year 'twenty five guidance. We expect our total organic revenue to decline 4% to 6%.

Speaker 3

In GBS, we expect our full year outlook to be slightly positive with the first half performance in line with our Q4 of fiscal 2024 and with a return to growth in the second half of the year. In GIS, given last year's bookings and the resulting impact to opening backlog, combined with continued expected lower resale revenue and deal selectivity in fiscal 2025, we anticipate full year organic revenue to decline in the low double digit range. Our guidance for adjusted EBIT margin is 6% to 7%. This guidance primarily reflects the impact from lower year tier revenue and investments we're making in the business to drive productivity improvements. Additionally, we will be executing on the previously mentioned restructuring action to improve margins on a sustainable basis going forward, with the impact of the savings largely materializing in late fiscal 2025 and into fiscal 2026.

Speaker 3

As I've mentioned on previous calls, we continue to rationalize our real estate portfolio. These potential sales will provide a cash inflow outside of free cash flow, but will have a negative impact on our adjusted EBIT margin. The potential loss on these sales is not included in the guidance as the market remains difficult and the timing is uncertain. And with this expected adjusted EBIT margin levels, our full year non GAAP diluted EPS guidance is $2.50 to $3 with an assumed non GAAP effective tax rate of 30%. Our free cash flow guidance for fiscal 2025 is about 400,000,000 dollars There are 2 main drivers contributing to the lower year over year level and without these changes, free cash flow would be at levels consistent with fiscal 2024 performance.

Speaker 3

As I previously mentioned, we will be reducing our debt levels in fiscal 2025 and a component of our debt reduction strategy is significantly reducing finance lease originations, which were $185,000,000 in fiscal 2024. This change in funding approach will reduce our overall debt levels, but will increase our capital expenditures impacting free cash flow. Also impacting free cash flow will be spending related to the increased level of restructuring, which will be an increase of approximately $250,000,000 year to year. Our expectation is that the restructuring savings will put us on a sustainable path of free cash flow generation above fiscal 2024 levels in fiscal 2020 6. As a reminder, our Q1 free cash flow is seasonally lowest, primarily due to the timing of bonus payouts and certain annual supplier payments.

Speaker 3

Consistent with prior years, cash flow generation will be strongest in the second half of the year. And now our Q1 outlook. In GBS, we anticipate that revenue performance in A and E and Applications will continue to reflect the current challenging market environment. And in GIS, services revenue will decline in the mid to high single digit range with resale taking the GIS decline to double digits. With these factors, we expect total company organic revenue to decline 7% to 8%.

Speaker 3

We anticipate adjusted EBIT margins in the range of 5.5 percent to 6%, a function of the lower revenue and first quarter seasonality, which has consistently impacted our results in prior years and finally, non GAAP diluted EPS of $0.55 to $0.60 With that, let me turn the call back over to Raul for key takeaways.

Speaker 2

Thank you, Rob. There is quite a lot to do to operate at a higher level. That's why I'm so happy with the additions to our executive team in the last 60 days. They are all industry veterans with proven track records. We will define success by continuing to perform better every quarter while we transform as quickly as possible.

Speaker 2

Thank you for attending the call. Operator, we're going to open it up for questions. Thank

Operator

Your first question comes from the line of Bryan Keane with Deutsche Bank. Your line is open.

Speaker 3

Hi, guys. Thanks for taking the question. Raul, maybe you could just help us understand how your restructuring might be different than many of the CEOs that came before you that had a lot of restructuring as well. It seems like every 5 years or so a CEO comes in, looks at the business and restructures it. Just trying to get a sense of how maybe your plans might look different than what we've seen over the last few decades at CSC and now DXC?

Speaker 2

Yes. Okay, great question. Thank you. I know that as you've mentioned in the short history of this public company, there have been previous restructurings. But as someone who just got here and have really spent a lot of time operationally looking at our systems, our processes, our entities, our distribution of headcount, it's clear to me that the previous restructurings did not set a real clean, solid, fully integrated baseline for profitable growth.

Speaker 2

You can look at that in multiple ways. Number of systems still in place that were acquired over time, never integrated, never deduped, number of business processes that got stacked on top of each other, number of legal entities. I think anyone that came in would look at the previous work. And again, I know the history is there, so I'm not running away from it. But I can tell you that this is a real reset.

Speaker 2

It is bottoms up. It is a strong foundation to go from and it was absolutely needed because otherwise we just continue to carry a really not fully functional organization that can take advantage of the opportunities that we have.

Speaker 3

Got it. And then just as a follow-up, are any of the restructuring charges, are those going to be are those through the P and L, so they're in the margin targets that we're looking at? Or are those outside those targets? And then secondly to that, just on GBS, a little bit of a recovery. I think you talked about in the second half of the year.

Speaker 3

What gives you confidence in that GBS recovery for positive organic growth in the second half? Thanks. Yes, Brian, this is Rob Delvedi. Thanks for the question. First on restructuring, restructuring is not included consistent with the approach taken since the beginning of the company.

Speaker 3

Restructuring is not included in the adjusted EBIT margin. It obviously is included in the free cash flow numbers. So that's the answer to your first question. On the GBS first half to second half dynamic, with the difficult marketplace, we do see the first half of the year performance similar to the back half of fiscal twenty twenty four. We have some encouragement, our pipelines have been improving and our conversion rates are consistent.

Speaker 3

So with that improved pipeline and conversion rates, we see us going from low single digit negatives to low single digit positives in the second half

Speaker 2

of the year. And it's all built on, again, new leadership there, new lifecycle management in terms of opportunities. So pre proposal, proposal, pitching smarter, better, faster, and also eliminating, frankly, some self inflicted delivery issues that we have had and in some cases, we're still working our way out of. As I've mentioned before, this isn't one lever. This is a lot of little levers.

Speaker 2

And I think one of the things that has given me additional encouragement that I'm looking at it correctly and the team's looking at it correctly is that as we've brought on great new experience, executives from great companies that have been succeeding in the marketplace all over the world. They have confirmed that it's a very opportunity rich environment, meaning we have a lot of things that we can be doing better. And if we do those things better, again, not rocket science, operational excellence and I'd say in some cases, just getting the average that will show up top line and bottom line and conversion and show up in gross margins, net margins, etcetera. So I feel like we've got a way to go to get to a base and then we from that base, we're going to continue to grow off of it. But I think we've got the right people, the right structure and now the right go to market model and incentives, and I'm encouraged.

Speaker 3

Great. I'll pass the line. Thanks.

Operator

Your next question comes from the line of Tien Tsin Huang of JPMorgan. Your line is

Speaker 4

open. Hi, thanks so much for going through all this. I'm just curious on the bookings side, how that came in versus planned and a little bit more detail and what we might expect as the fiscal year plays out here in terms of replenish either new logo or renewal?

Speaker 3

Yes. So Tien Tsin, thanks. So the bookings relative to the last forecast we gave 90 days ago were pretty consistent and actually a little better in GBS. And that was really due to renewals in A and E were strong and it's the Q2 in a row they've been strong. And in my remarks, I mentioned that those renewals, they don't translate into revenue growth in the first half of the year, but they do produce they provide rather a solid foundation for the second half.

Speaker 3

So that's so we did a little better than anticipated. We did as expected in GIS and we going into fiscal 2025, we expect a very similar picture where we have strong renewal activity in both GBS and GIS and then new content and based on the pipeline, new content in GBS filtering in throughout and improving throughout the year in fiscal 2025.

Speaker 4

Perfect. Thank you for that. And then maybe Raul, just quickly, my quick follow-up, just with the additions to the management team, I know you're bringing some people in from familiar places. Are you done with some of the additions? Do you expect some other turnover or maybe new roles that should expand into the management team?

Speaker 4

Just curious what your thinking is there. Thank you.

Speaker 2

Yes. And look, you've seen some of the releases, right? So we've obviously announced some publicly and then there are others that we didn't announce, but they've joined the team across the organization. I've had the pleasure of working with a lot of great executives over my 25 plus years in technology. And in that journey, we've had the opportunity to work together.

Speaker 2

Many of the executives that have come here, we've had the opportunity to compete together, work together and win together. So, yes, we've got a few more that are coming. But in terms of looking at the people that we need to execute, building on top of the team that's here, the great team that's here and adding some great executives that are fit for the roles where we needed additional horsepower, I feel like I've got the team 90 plus percent in place.

Speaker 4

Okay, good. Good to know. Thank you.

Operator

Your next question comes from the line of Bryan Bergin with TD Cowen. Your line is

Speaker 5

open. Hey, guys. Good afternoon. Thank you. First question on just on free cash flow.

Speaker 5

So understanding you have $250,000,000 restructuring headwind that seems to be the biggest chunk in the year over year bridge. But can you talk about otherwise maybe the levers for free cash flow sustainability amid ongoing top line and potentially margin pressure? And can you also talk about maybe the annual outflows associated with capital lease payments going forward too after free cash flow?

Speaker 3

Yes. So in terms of free cash flow, we start from a base of strength 3 years in a row over $700,000,000 $750,000,000 in fiscal 2025. And as I mentioned, the two impacts to that number are the increase in restructuring of 250 and then the curtailment or significantly curtailing new lease originations, which does shift the spend over to CapEx impacting our free cash flow number in the year. Now we do have operating leverage here with or leverage with working capital. So there is room for improvement in working capital.

Speaker 3

We're going to be taking advantage of that in fiscal 2025 and beyond. And again, with the purpose of the restructuring is to shore up EBIT moving forward, 2025 into fiscal 2026 and curtail that headwind that we faced for the last couple of years. So that's the plan. In terms of cap lease payments, we're in the low 200s and that will continue to wind down. In 2026, it will be in the it will go from a 200 range to 100 range and then down from there.

Speaker 1

And just to foot stop this, the lease originations will go from 185,000,000 in FY 'twenty four to 0 in 'twenty five.

Speaker 3

So a very small number.

Speaker 1

And that's a $185,000,000 reduction in the free cash

Speaker 3

flow. Yes.

Speaker 6

Thank you, John.

Speaker 5

Okay. Okay. That's very helpful. Okay. And I guess a follow-up, just as we think about the top line, the $25,000,000 guide, as we try and unpack some of the factors you considered here as it relates to kind of revenue retention and whether you're also working to actively prune out any unfavorable basis of business contracts, any pieces of business you're looking at and assessing is not strategic to the company.

Speaker 5

Anything like that working through kind of here to be mindful of as you built the outlook?

Speaker 2

Yes, especially in ITO and modern workplace where historically there's been the packaging of less than optimal profitable reselling of product, reselling of software, that guidance or that direction changed when I got here. And we are going to have profitable contracts, profitable relationships to the extent we don't have them right now. As we get into renewals of contracts, we're going to address that and then put them on the right footing. But the mandate is clear now that this isn't growth, growth at all costs, growth at a loss. This is growth with real profitability and a real foundation.

Speaker 3

Yes, Brian, just piggybacking on that, we've incorporated that selectivity into our guide on revenue. So that's included along with continued reduction of low margin resale. Okay, so all of that is packed into the GIS element of the guide.

Speaker 5

Okay. Did if I missed it, I apologize. Did you quantify that piece just so we can

Speaker 2

kind of parse that out?

Speaker 3

Didn't quantify specifically the various elements, but in my opening remarks, I mentioned that we'll be high negative single digits in GIS and with the resale, it'll be negative double digits, low double digits.

Speaker 5

Okay. Thank you very much. Thank

Operator

you. Your next question comes from the line of Darrin Peller with Wolfe Research. Your line is open.

Speaker 7

Hi, thanks. This is Paul Lebrecht on for Darrin. Can you just provide some color on what you're seeing in the broader macro environment and client behavior and maybe how that relates to 3 months ago? And as you built your fiscal year 2025 outlook, were you assuming any improvement in the broader demand as we go through the year?

Speaker 2

Sure. Look, I think there are a couple of factors, right, with companies that are operating at different levels of efficiency. And I think our issue is being more effective across the whole lifecycle of capturing business, new business, solutioning it correctly, pricing it correctly, as well as on our existing business, obviously, winning the recompetes and being able to create the right economic model for those recompetes. We have plenty of opportunity in the universe that we operate in. I think from a macro standpoint, I echo what others have said in the space that some discretionary spending is paused and has lightened up.

Speaker 2

I do think that that is less of a headwind for us than optimizing our go to market and sales functions and getting those better. We can do we have our destiny in our hands by being better against the opportunities that we get to compete on. And that will be a bigger factor for us in the near term than the general macro environment.

Speaker 7

Got it. That's helpful.

Speaker 8

And then as a follow-up,

Speaker 7

you mentioned in modern workplace, you could see you reach a point where 75% of the workforce is non human. Can you just touch on the path to get there and what you're doing right now in the business to improve efficiency?

Speaker 2

Sure. If you think about a lot of the work there, it's a lot of resolution, small resolution of items across multiple people, humans, devices, countries, companies, etcetera. If you look at the focus of AI, specifically co pilot and the ability for agents to use large language models, small language models, real precise models to really proactively and interactively answer and deal with questions. That's the shift where we're going to be using AI in a manner where we can handle the workload same or more with a greater infusion of technology and not relying on an increase of humans or people for that. As we transition that, you'll go from a ratio of roughly 40% to 70 plus percent.

Speaker 2

And that's the reference that I made there. But that's real. That's happening. It's actionable. We're experimenting with it across multiple accounts.

Speaker 2

And the other piece of good news is that the speed of compute behind AI is doubling every 6 months. So the speed, accuracy and multimodal ability for a virtual agent to really be a great partner in delivering these services at a high quality is there today and getting better and we're going to take full advantage of it. Great. Thank you.

Operator

Your next question comes from the line of Jonathan Lee with Guggenheim Securities. Your line is open.

Speaker 8

Great. Thanks for taking our questions. I appreciate the level of detail here. You talked about working through some of the resale dynamics to help profitability. Can you help us understand any other levers you have across contract profitability, whether that's pricing or delivery?

Speaker 3

Yes. So Jonathan, there's I think there's leverage across the board, in particular in the ITO business. I'll just take that first. We've been on a march to reduce physical capacity with the revenue reductions we've experienced and we will continue that this year as well. And the $100,000,000 of restructuring between the $250,000,000 year to year growth and the base of $350,000,000 that $100,000,000 is predominantly on physical capacity.

Speaker 3

So that's one element that will deliver savings into the future. The second element is just efficiency and infrastructure at the account level and we are going after that with the restructuring funding. So while we're very good at our service delivery levels, we've got high NPS scores. Our restructuring is designed to eliminate the overhead within the accounts as opposed to the direct delivery population that we have. So and we are firmly on that track and that's how we're going to execute the restructuring.

Speaker 3

In the GBS business, we have room to improve margins. And specifically in the consulting and engineering business, our margins are below competition. And again, the restructuring is designed to help us narrow that gap to competition in that business unit. That's another lever for us.

Speaker 8

Great. Thanks for that. And just as a follow-up, as you think about the realignment of the company on a business unit basis versus geographic prior, can you talk about some of the client receptivity there?

Speaker 2

Yes. And it's really the intersection, right, because it's the intersection of the talent, the managers, the delivery at the geography in tight coordination with the offering. And so what you're getting just from the beginning of the lifecycle is better pre bid solutioning, better solutioning, better deployment once you win. One of the things that companies can trip themselves up on and we certainly have is not being timely in the staffing or fully staffing of something that's one that leads to SLAs. That's completely self inflicted, 100% avoidable.

Speaker 2

If you plan better, you execute better. So that's another example of seeing a lot of little things that other organizations can do and I know we can do better that can have an impact. And that impact will be every month, every quarter, and we'll see that. So, those are just some of the elements that I think our new go to market really resonates with both the local geography engaging the offering at a global level and ultimately the most important thing, which is the customer. And in my several dozen conversations, in the last 150 days In talking through why we think this is a better way of serving our customers, it's been very receptive and very engaging with our customers.

Speaker 8

Appreciate that clarity. Thank you.

Operator

Your next question comes from the line of Spencer Hansen with Susquehanna. Your line is open.

Speaker 6

Great. Thanks for taking my question. Raul, you had some really interesting call outs on the insurance business. Can you just speak to any broader strategic or even tactical opportunities you see there with the insurance business? Thanks.

Speaker 2

Great. Yes. As I looked at every business unit, I think, I very early on became clear to me that we have an outsized opportunity in terms of a return on effort with our insurance business unit. With that opportunity in hand, we're exploring a small select and experienced group of partners that could help us accelerate growth with a good SaaS and reoccurring services mix, while maintaining control of that business unit. So we're in that process right now.

Speaker 2

It's a great foundation. It's a great set of customers, a great history with those customers and really a critical partnership across the world in every aspect of supporting the different product lines that our customers bring to the marketplace.

Speaker 6

Great. Thank you. Appreciate it.

Operator

Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Speaker 9

Thank you very much. I wanted to ask about go to market and sales process. I know Raul, in past conversations, you've talked a lot about improving and tightening up the message to customers so that they understand the value that DXC can deliver, etcetera. And it sounds like with some of the changes that you've made that the pipeline is expanding, but conversion rates are pretty stable. And it sounds like that's kind of the assumption for right now.

Speaker 9

But like how should we think about the process and the time to start to even improve conversion rates and how that may be helpful to getting the business back to growth?

Speaker 2

Yes. I think it's a function of the fundamentals, right? The fundamentals that we're operating under in ITO and modern workplace. The new leadership and the focus on key vertical solutions replicability in consulting and engineering services. And also, in talking to customers, I always, if it's an ITO customer, modern workplace, I always come prepared to discuss something relevant in another business unit that they may or may not be aware of.

Speaker 2

And frankly, it's a good surprise, but I'm surprised that many of our existing customers where we've got tens, in some cases, 100 of millions of business in one division, do not know and do not appreciate the talent, the experience that another division has. So just the more effective cross pollination, cross sale in existing accounts is something that I see as an opportunity and relatively low hanging because again in my several dozen meetings, I've always tried to say, and hey, as you're thinking about this, did you know we did this? And most of the time the answer is, oh, no, I didn't know that, please let's follow-up. So if you scale that and then operationalize that, we are going to be able to get incremental demand from our existing base. Because in many cases, we've got a great beachhead, a great history and a great relationship with one offering and a customer, but that should be a gateway, an effective gateway, a fast gateway to compete with the other offerings.

Speaker 2

And that mechanism, that orchestration, that collaboration, that packaging up of stories, as I've mentioned before, all of that is happening as we speak. And frankly, it wasn't happening at a good level before.

Speaker 9

And it sounds like then for the most part, I mean, you've talked about some incremental partnerships, for example, on the insurance side, but it sounds like you feel like you have all the or at least the majority of assets to be able to execute and deliver that cross sell. Is that fair? Or are there other things

Speaker 5

that you think you're going to need

Speaker 9

to add into the mix?

Speaker 2

No. We have what we need to compete. We have what we need to compete profitably and grow. We have to get some internal systems aligned. We've got to, as I mentioned earlier, dedupe, streamline and do some work that should have been done before and it wasn't.

Speaker 2

But we're going to get it done with speed and we've got to perform every day, every week, every quarter while we transform and transformation is the restructuring and we've got to do both quickly.

Speaker 9

Great. Thank you so much.

Operator

Your next question comes from the line of Bradley Clark with BMO Capital Markets. Your line is open.

Speaker 10

Hi, thank you. This is Brad on for Keith Bachman. I want to ask about your thoughts on GIS and market growth over time. You've alluded to sort of participating in just broader GIS market growth rates implying perhaps low single digit decline over time. Is that still how you're thinking about potential growth of both the market and or GIS longer term given the changes you'll be making to the business?

Speaker 3

Yes. Bradley, I think that's about right. We have a very realistic view of the market and our goal is after rationalizing the portfolio and focusing on exiting unprofitable contracts and being selective, we our goal is to get to market growth rates, which we see in the low negative single digit range. So that's where we're pointing the business in that direction.

Speaker 2

And just to be clear, we're operating at a worse level than that. So the first goal is to get to normal or more baseline with other competitors. Once we get there, then obviously the next step is to find another target and try to meet and beat it. But in the near term, it is to get in line with our competitors with regards to our growth rate, where it is today and where it should be as a comp.

Speaker 10

Okay. Appreciate the insight.

Operator

This concludes the question and answer session. I'll turn the call to Raul Fernandez for closing remarks.

Speaker 2

Thank you very much for joining us. I appreciate all of the employees that come together every day to deliver great services for our customers, value all the investors. I definitely also appreciate the sense of frustration and urgency to get things done. And that is what I'm 100% focused on. So thank you very much for attending today.

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Earnings Conference Call
DXC Technology Q4 2024
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